Congress Seeks to Restrict Nondebtor Releases in New Bankruptcy Reform Bill

On July 28, 2021, certain members of Congress introduced the Nondebtor Release Prohibition Act of 2021 (S. 2497) (NRPA), which proposes to amend the Bankruptcy Code to, among other things, restrict courts’ ability to approve third-party releases of nondebtors and related injunctions under plans of reorganization or otherwise in Chapter 11 cases. Although the NRPA was introduced in response to testimony criticizing the third-party releases and injunctions proposed in the USA Gymnastics cases and Purdue Pharma cases, the NRPA’s provisions are not limited to the mass tort context, and, if enacted, would have significant implications for all Chapter 11 cases. The authors submit that while some of the concerns regarding nonconsensual third-party releases may be valid, the NRPA goes too far in limiting what can, in the right circumstances, be a valuable tool in restructurings.